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Executives

Greg Peterson - Director of Investor Relations

Martin H. Richenhagen - Chairman, Chief Executive Officer, President, Chairman of Executive Committee and Member of Succession Planning Committee

Andrew H. Beck - Chief Financial Officer, Chief Accounting Officer and Senior Vice President

AGCO Corporation (AGCO) 2013 Annual Analyst Briefing Conference December 17, 2013 8:30 AM ET

Greg Peterson

Good morning, and welcome to AGCO's 2013 annual analyst briefing. My name is Greg Peterson. I head up Investor Relations for AGCO. I'd also like to thank all of you for being here in New York, and to welcome those that are joining on the Internet today. Those of you that are on the Internet, you can follow on with our presentation. We do have slides posted there and later today, we'll have a full replay of our session posted on our website.

So we'll start this morning with Slide 2, where you'll find the objectives for our meeting. First, we'll take a look at the returns AGCO has produced for our shareholders over the last 10 years and discuss some opportunities to improve that as we go forward. We'll discuss how AGCO's positioned to succeed in growing markets. And finally, we'll talk about what AGCO can do to ensure we'd benefit from the positive market forces that we see in front of us.

So with those market -- with those meeting objectives in mind, our agenda today, you can see on this next slide. Martin will cover our past, future returns for our shareholders. He'll look at some important industry- and company-specific growth drivers and provide an update on our progress against our strategic initiatives. We've scheduled a short break after Martin's presentation. And then after the break, Andy will discuss margin improvement plans, provide an overview of our priorities for cash flow allocation, and then conclude his remarks with a preliminary 2014 outlook. I'll ask that everyone hold their questions until the very end, and then everybody will be available to take your questions at that point.

Slide 4 looks at our Safe Harbor information. Some of our remarks today will contain forward-looking statements, including statements regarding demand for our products and economic and other factors that drive that demand, product development plans and timing of those plans, acquisition expansion and modernization plans, our expectations with respect to the costs and benefits of those plans and timing of those benefits, and our future revenue, earnings and other financial metrics. Actual results could differ materially from those projected statements. For a discussion of the factors that could cause actual results to differ, I refer you to our Form 10-K for the year ended December 31, 2012, as we filed with the Securities and Exchange Commission. A reconciliation of our non-GAAP metrics can be found at the back of Andy's slides.

The company update starts on Slide 5. AGCO is fully dedicated to the production of farm machinery, grain storage solutions and protein production equipment. Our products are equipped with leading technology, enabling farmers to be more efficient and more productive. They are offered under multiple brands, we're one of the largest global distribution networks in our industry, including more than 3,100 independent dealers in more than 140 countries. We have a well-diversified revenue base with some -- with most of our sales outside the United States, and we're well positioned to take advantage of the global opportunities on our industry.

With roots in the agricultural industry stretching back over 100 years, AGCO is a rich brand heritage which you can see pictured on Slide 6 through our core brands: Challenger, Fendt, Massey Ferguson, Valtra and GSI. AGCO has become a global leader in the design, manufacture and distribution of agricultural solutions. Challenger is a respected full line machinery product and delivers high specifications, high technology to professional farmers around the world, primarily through the strong CAT dealer network. Fendt, which is based in Germany, remains a market leader in Europe, positioned on the cutting edge of design, engineering and technological leadership. Massey Ferguson is one of the most widely sold ag equipment brands in the world, and it offers a complete rugged and versatile product line to fit virtually all types of farming applications. Valtra continues to hold a dominant position in both the Nordic region and the fast-growing Brazilian market, with tractors built to deliver the highest levels of performance in some of the toughest working conditions. And finally, the GSI family of brands provides a leading position in the global grain storage and protein production market. With that brief company overview in mind, we'll move on to our strategic priorities. And for that, I'm pleased to introduce to you our Chairman, President and Chief Executive Officer, Martin Richenhagen.

Martin H. Richenhagen

Thank you very much, Greg. Good morning, everybody. Thank you for being with us today and for your interest in AGCO. Our goal this morning is to share some of our optimism about future demand for farm equipment and explain how AGCO strategic initiatives will further strengthen our competitive position and improve our financial performance. 2013 will be a record year for AGCO, the fourth in a row, both in terms of sales and earnings. More importantly, this year, we also made improvements in a number of areas that have positioned us to benefit from a very bright future in our industry. I will start this morning with a brief look at the returns AGCO has generated for its shareholders and highlight how we can improve returns in the future. Next, we'll review the positive macro trends driving our long-term outlook, and I'll conclude with a review of our strategic priorities. Now comes my favorite chart because very soon, I will be 10 years with AGCO. Slide 9 gives you some historical perspective and illustrates how AGCO has developed over the last decade. The company has tripled its sales volumes and grown its earnings nearly 5x. During this time, we shifted our strategy to focus on organic growth and increase investment in our products and facilities. We are pleased to say that we are moving strongly in the right direction and we are optimistic about our ability to continue delivering on our strategic imperatives. For 2013, we expect to post sales growth of nearly 10% and about 100 points of operating margin improvement compared to 2012.

Slide 10 shows you how our improvement financial -- how our improved financial results have translated into attractive returns for our shareholders. AGCO's shares have grown at a compounded 13% rate over the last 10 years versus about an 8% rate for the S&P 500, including reinvested dividends from the S&P companies. We realized that an important component of capital allocation is the return of cash to our shareholders. With a healthy balance sheet and an improved U.S. cash flow generation capacity, AGCO's management team and its board took the first step in 2012 with a rather small share repurchase program, and last March, we initiated a dividend. New developments are now allowing AGCO to announce a more expensive share repurchase program for 2014. The development include an improved tax position and a one-time opportunity to repatriate cash to the U.S. This new share repurchase program demonstrates our commitment to driving attractive returns for our shareholders.

As can be seen on Slide 11, we plan to repurchase $500 million of AGCO shares. Andy will give you the specifics during his presentation. Going forward, we will take a disciplined approach to maintaining our investment-grade credit rating and growing our dividends.

The global population recently reached 7 billion people. I remember when I came to work the first time, we were 4 -- no, 5. An increase of 900 million in just the past 11 years. So here, we talk about different numbers. I recall that we were 5-point something, maybe I'm wrong. The World Bank's projection for 2050 is 8.9 billion. On average, it is estimated that the world will add the equivalent of the population of Italy, I don't know why we picked Italy here, about 60 million people -- I think it's because of the excellent food -- each year over the next several years. In return, the UN estimates food production must increase 70% in the next 40 years. The consumption of food and agriculture products is a function of the size of the population and the per capita disposable income. In Asia, with improved income levels, protein consumption has been increasing, placing more strain on grain supplies for animal feeds. The increased protein consumption is one of the factors resulting in higher commodity prices. Efforts are underway to boost farm productivity globally, which will depend on the use of improved fertilizer and seed technology, upgraded storage and handling capabilities, as well as increased mechanization of farming.

Slide 14 shows how the gap between corn use per acre in the U.S. and the rest of the world has grown over the last 30 years. The lower yield you see in some of the developing markets provide a significant opportunity for AGCO. The growing population and dietary changes occurring in the developing markets are likely to stimulate efforts to boost farm productivity globally and reduce postharvest of waste. We believe these improvements could center on the use of improved fertilizer and seed technology, expanded grain storage and increased mechanization of farming. Professional farm machinery will be one of the key factors in producing increased crop yields in the future years. This chart confirms that there's significant opportunity for our equipment to have improved yields in markets such as Brazil, Russia, China and also Africa.

Slide 15 looks at the strong growth in U.S. farm income over the last 2 decades. Demand for commodities has caught up with global capacity. Biofuel, fuels use, the growing population and increasing emerging markets' protein consumption are all responsible for the increase in demand. Stocks-to-use ratios for the key food crops are below historical averages, driving crop prices to attractive levels even as the global economy continues to struggle. There's a very tight correlation between farm income and farmers capital investment, and we are very optimistic that high farm income levels will continue to support growth in our industry over the long term. Farmer balance sheets have also improved dramatically. This year, by the way, farm income in the U.S. is estimated to be up 15% over 2012. The graph on the right side of this slide illustrates the low debt levels farmers are carrying. These improved farm economics are also in place in Western Europe and Brazil. With consistently healthy cash flow and low debt levels, professional farmers have implemented regular equipment replacement schedules based on total cost of ownership. We expect this trend to continue even in years of moderating farm income.

There's a significant opportunity for our equipment to help improve yields in regions like Eastern Europe, Brazil, Russia, China and Africa. The next few slides look at the growing demand in these markets. Agriculture continues to be an important part of the Brazilian economy and an important source of future income growth. Unlike most of the developed agriculture markets, there's a significant opportunity for farming expansion. Brazil will benefit from the world's growing demand for both food and fuel. Brazil is already one of the leading exporters of soybean, sugar and coffee, and is a leading producer of sugar cane-based ethanol. The government support of the ethanol industry has driven ethanol consumption to about 40% of total automobile consumption. Mandates for bio-diesel usage are also in place. They will require millions of hectares of soybeans to meet the bio-diesel targets. Government support for the agriculture industry comes mainly through subsidized FINAME loans from farmers -- for farmers. Last week, the Brazilian government announced that supportive rates will be in place for 2014 as well. AGCO is well positioned to benefit from the favorable trends in Brazil. We are making significant investments in South America to expand and modernize our product line and to meet the diverse needs of our customers.

The developing markets in the CIS countries provide significant growth potential. There's an immense amount of farmland in Russia, Ukraine and Kazakhstan, being farmed with very inefficient machinery and inadequate storage and handling capabilities. These 3 CIS countries have arable land roughly equivalent to that of the United States. The investment in farm equipment and infrastructure dropped to very low levels over the last 15 years, and crop yields in this region have suffered.

The chart on Slide 17 highlights the low level of investment in Russia compared to the United States. Even during the last peak in the CIS region in 2007, only about 5,000 high-horsepower tractors from vessel manufacturers were sold. That compares to over 35,000 high-horsepower tractors that will be sold in the U.S. in 2013. While the market has been impacted in recent years by limited credit and drought, we continue to believe the CIS market has significant growth potential for manufacturers of premium equipment suitable for large-scale farm production. AGCO is investing in distribution and service capabilities and in local manufacturing in these markets to position ourselves to benefit from the expected future growth in Eastern Europe and Russia.

Africa is a continent of 53 diverse countries, many of which have significant potential for growth in the agriculture sector. With a population of over 1.2 billion, which will, by the way, double, it has over 20% of the world's people and only 11% of the world's arable land, 86% of which is uncultivated. To complicate matters, their population is growing 2.3% per year. The world's fastest rate of growth. Farm sizes on average are larger than those in China and India. Foreign investments in land and -- in land for food and biofuel is increasing. And with the event of improved drought-resistant seed technology, Africa looks to be a long-term source for future growth. With over 50 years of experience in

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and commitment. Over the last decade, we have been working to have the right products and the right technology to compete effectively in today's dynamic marketplace. To ensure AGCO continues to improve its competitive position and its performance, we have put initiatives in place aimed at growing our sales, reducing expenses and better utilizing capital. I'll finish my presentation with a look at our key strategic initiatives. We integrated sustainability into every aspect of our business. We are evolving our operations by continuously improving efficiency and resource management, as well as fostering a safe, inclusive and productive workplace. Our employees throughout the world are key partners in this journey. We look to them for new ideas to enhance efficiency, reduce cost, eliminate waste and create whole farm technology solutions for our customers. We have committed to strengthening relationships with preferred suppliers that support quality, environmental stewardship and high labor standards. We're also committed to helping our customers be more productive and profitable to meet growing needs for food, fuel and fiber. Globally, AGCO provides technologies that help farmers maximize yields, reduce loss and conserve resources that are key to food security and a sustainable future.

We have developed strong communities where our customers operate by supporting productivity and minimizing the global gap in farming yields through innovation, quality and service. AGCO is working to produce innovative products that provide our customers with high-tech solutions to meet their need for improved efficiency, productivity and profitability. Farmers are accelerating the use of precision farming and fleet management technology to improve their productivity. They are operating their farms like modern factories. To lead this transformation, AGCO launched our new strategy called Fuse Technologies. Fuse Technologies connects products together like never before. It is a commitment to customers to provide solutions that optimize, coordinate and seamlessly connect their equipment and their farm. First, Fuse Technologies will utilize wireless data communication to optimize the machine's performance and proactively anticipate machine issues to minimize downtime. Second, Fuse Technologies will help farmers coordinate multiple pieces of equipment from all brands and makes and coordinate complex task on their farm to eliminate nonproductive waiting time. This optimization includes stationary assets like grain bins and non-AGCO equipment like grain trucks, water tender trucks and much more. Finally, AGCO will help farmers optimize the output on each portion of their farm field. Historically, growers have treated their fields as homogeneous. They repeated the same tilling, seeding and spraying practices pretty much every year. Through our Fuse Technologies, farmers can break down fields into separate management zones and create site-specific approaches to maximize yields while minimizing input costs.

AGCO is increasing its investments to deliver a wide array of products, services and support capabilities in order to meet customers and dealers needs. Fuse will connect all of AGCO's technologies, including guidance, telematics, diagnostics, seeding and application controls, yield monitoring, mobile apps and grain port-in management. It can be as simple as a single GPS-enabled guidance system for a piece of farm equipment or as complex as remote monitoring and controls of multiple infield devices using an integrated software platform. The capability will be delivered through a series of new and upgraded products like AGCOMMAND, an industry-leading wireless solution that provides actionable machine information for professional farmer and dealers to support improved operations. Another example in our premium Fendt brand is our VarioDoc offering. Through this technology, AGCO was a leader in seamlessly transferring data from the farmers' equipment to our economic partners to allow for more precise and productive planning on the farms' use of inputs. Fuse Technologies provides connectivity tools that help growers manage and communicate with the equipment, mobile or stationary, making sure that they are in the right place at the right time and working together regardless of brands.

AGCO is working with its dealer network to leverage these new capabilities to offer new types of services. Services will include optimizing the performance of equipment, anticipating service needs to prevent downtime, improving the logistics of multiple pieces of equipment and simplifying precision farming decisions. These services are being piloted at several dealers as we support their transition from equipment dealers to solution providers in the future.

The objective of our research and development work is to deliver the highest-quality products and services that exceed our customers' expectations at the right price. Slide 25 details the steady increase in our research and development spending over the last decade, and we expect to spend more in 2014.

To help grow our business and maintain our competitiveness, we expect to maintain a consistent engineering spend as a percentage of our sales. We are continuing to refresh our full line of equipment with a focus on high-horsepower products for the growing professional farming sector, as well as new products which will be -- which will expand our current product offering. Our engineering cost include significant efforts towards meeting the Tier 4 engine emissions requirement in all our engine-powered products in both Western Europe and North America. These efforts will continue through the implementation of Tier 4 Final requirements in 2014 and '15.

You can see the results of our increased R&D efforts on Slide 26. This slide shows the AGCO booth at last month's Agritechnica Show. Agritechnica is the world's largest farm show held every second year in Hanover, Germany. Our booth gave us a very strong presence at the show, and our new machines were very well received. 3 AGCO models earned Machine of the Year Awards and 1 is a combine. We are especially pleased about the recognition of our new harvesting products as we focus on growing that part of our business.

Slide 27 lays out our 5-year new product program for our tractor products. This accelerated pace of new product introduction is the result of our increased engineering spend in the past, as well as the need to meet Tier 4 Final emission requirements. Pictured on this slide are some of the new products we will be introducing in 2014, all with Tier 4 Final compliant engines. From left to the right, the new Fendt 900 series featuring a new drivetrain which generates leading fuel efficiency. By the way, at Agritechnica, we also already showed a selected group of customers the model on top of that, our new Fendt 1000. The center photo is the flagship Massey Ferguson 8700 series with an AGCO-powered Tier 4 compliant engine. And on the right, the new Valtra T Series with improved CAP ergonomics and the latest Valtra styling. Also in 2014, we will be launching the first products for our completely new global platform of SAP 135-horsepower tractors, which you know as our Centurion program. Andy will provide you all of the details during his presentation.

AGCO is a global leader in tractor sales, and we have a significant opportunity to leverage our strong brands with new and improved harvesting products and improved distribution capabilities.

Slide 28 illustrates the growth in our 5-year new product plans and shows you a sample of some harvesting products we plan to introduce in 2014. Based on the award recently received, we are making progress with the evolution of our harvesters. Pictured on the left is the new Fendt 850-horsepower Forage Harvester. The combined picture in the lower right is Gleaner's new Class 8 machine which will receive the AE50 award for innovation in February. Let's move now to the growth opportunities we have with our grain storage and protein production businesses.

Okay. We get a lot of questions from our investors about the types of products GSI sells and its growth opportunities. Since a picture is worth a thousand words, I have a video I would like to show you that features Tom Welke, the head of our GSI business. And this video was shared with AGCO's top managers at our biannual strategy meeting a few months ago here in the U.S. The video gives you a detailed look at GSI's products and the opportunities we have to grow this business.

[Presentation]

Martin H. Richenhagen

As Tom just outlined, there are substantial growth opportunities that exist in both the protein production and grain storage segment. As you can see from the charts on Slide 29, significant growth is expected in both areas. The next few slides examine some of these growth sectors in more detail. Inefficiencies in handling crops after harvest creates significant opportunities for our grain storage and handling businesses. As Tom mentioned in the video, the biggest opportunities exist in the developing markets.

Slide 30 illustrates the losses that occur in the world grain product markets and also the potential return. In this chart, the dark blue portion of the bars are the losses that occurred while the crops are being harvested. The light blue portion of the bars reflect losses that are occurring post harvest and are caused by spillage and degradation during handling, storage and transportation between farm and distribution. GSI handling, conditioning and storage products help our customers reduce these postharvest losses. Brazil is one of the world's leading grain producers and has made significant investment in on-farm production. At the same time, the postharvest handling, conditioning and storage capacity has not kept pace with the increased production. Slide 31 shows that Brazil has the capacity to store only 75% of its grain products. When you consider that storage and handling equipment is required at every stop between the farm and the end-user, storage for well over 100% of production capacity is needed. The Brazilian government recognizes this problem and, a few months ago, introduced a new $12 billion multi-year financing program to promote increased investment in grain storage. Even with this new program, it may take up to 10 years to close the storage gap in Brazil. AGCO is improving its local production capabilities and intends to earn an important share of this growing market.

Slide 32 highlights an example of the opportunities for GSI's protein production business. Significant differences in productivity levels exist based upon degree of use of modern pork production practices, including genetics, nutrition, health, housing, feeding and environmental control. The graph on this slide highlights the fact that U.S. production -- productivity exceeds both Brazil and China by more than 50%. Consolidation of swine production in the developing markets is well underway, however, operations are suboptimal. Modernization of production equipment and practices are required, creating a significant opportunity for GSI products to help our customers close the gap. Similar opportunities also exist for GSI in the area of poultry production. Earlier this year, we took an important step toward growing our business in Russia by forming a joint venture with a local Russian business owned by one of those oligarchs, Oleg Deripaska. Our partner in Russia is Russian Machines, managed by leading Western European-experienced managers, a major holding of Basic Element with operations in a number of industrial segments, including automotive, military vehicles, rail, aircraft, farm equipment and road construction machineries. They have a joint venture in this area with Terex. With consolidated revenue approaching $5 billion and employing nearly 77,000 employees, Russian Machines is a very attractive partner. The joint venture will utilize an existing manufacturing facility at a bus factory in Golaz, near Moscow, south of Moscow. We expect to begin assembling combines and tractors early next year. Our joint venture partners will assist with access to their supply chain and with the strengthening of our dealer network and facilitate improved communication with local governments and agencies up to the top level.

My last section reviews the improvements being made to our dealer network. Our North American business continues to focus on streamlining our business and consolidating our dealer network. Slide 34 shows the progress we have made with our current dealer count which is now at about 700 here in the U.S. We started -- actually the U.S. and Canada. We started by establishing a distribution strategy for each local selling area and establishing a dealer development organization responsible for facilitating the consolidation. We have evolved our North American distribution in 2 directions. Our legacy Massey Ferguson dealers offer a full line of wheeled tractor, harvesting and seeding and tillage products, and serve customers ranging from small lifestyle farmers to major corporate farms. We are targeting the large professional farming segment with our Challenger network and brand, which includes sprayers and truck, tractors in addition to wheeled tractors, harvesting and seeding and tillage. Challenger brand products are sold primarily through the Caterpillar dealer network.

The next slide looks at some of the investments being made in our Challenger distribution. AGCO's dealer distribution organization is working very closely with our dealer partners to make strategic investments that will help strengthen our distribution and help them create financially sound, professional producer dealers that has the capacity and capability to grow AGCO's business.

Slide 35 illustrates new store locations opened by Ziegler Cat, Whayne Supply, Thompson Machinery. Ziegler Cat operates in Minnesota, Iowa

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Let me recap what we have heard so far this morning. First, AGCO is committed to improving shareholder returns. Second, we are very well positioned for growth in attractive markets. And finally, we are executing a successful strategy to improve AGCO's return on invested capital. I will be back to take your questions after Andy's presentation.

Greg Peterson

Thank you, Martin. Let's plan on reconvening promptly at 9:25. So we have about 10 minutes. Thank you.

[Break]

Andrew H. Beck

Okay, we're going to get started again. Now we'll get started again. Good morning, and good to see everyone that's here in the room, and also our participants on the Internet. We appreciate your interest in AGCO today. As Martin mentioned a few minutes ago, margin improvement's one of our top priorities, and I'm going to start the session with an update on a number of initiatives we have in place on improving our margins. And next, we'll recap the performance of AGCO Finance, our captive finance company joint venture. We'll also review our capital allocation plans, and I'll give you some more details on the $500 million share repurchase plan that we announced this morning. And we'll conclude the remarks with some preliminary comments on next year's targets for 2014.

In the first section of my presentation, I will finish the strategy discussion Martin started during the break. The fifth point on our 5-point strategic plan is centered around optimizing our costs and our investment. As you know, there's a high correlation between increased return on invested capital and improved shareholder returns. As we discussed last year, we have built a detailed roadmap to drive improvement in AGCO's return on invested capital as part of our ongoing strategic planning process. We have launched strategic initiatives aimed at improving each of the building blocks driving our return on invested capital which we laid out on Slide 4. For AGCO, the key to a higher ROIC is improved operating margins, and the majority of our improvement projects are focused on achieving margin growth.

Slide 5 highlights our long-term operating margin target of 10%. We aim to reach this goal by addressing a wide range of margin improvement opportunities. These strategies include focused attention to cost reduction from purchasing actions, factory productivity and new product development. In addition, sales growth is an important element of our margin improvement roadmap, which is achieved through success in emerging markets and improved products and distribution. In 2013, we continued to make progress despite heavy investment in new product development and Tier 4 compliance, the start up of our new Fendt facility and market development activity in China.

AGCO's material spend makes up about 75% of our cost of sales, so many of our projects are focused around our purchasing functions. Last year, we talked about 2 distinct material cost saving programs, Global Purchasing Excellence and best-cost country sourcing. This year, the benefits of both programs are captured on Slide 6. As you recall, our GPE program involved the reorganization of our purchasing function from a factory-based buying to a global commodity team approach. These commodity-based teams have developed better market and product knowledge which, along with global sourcing, helps to make better purchasing decisions and lower costs. Another important accomplishment in the area of material cost management has been the growth of our best-cost country sourcing initiatives. Our sourcing from Asia and Eastern Europe is gaining traction. We target a 15% to 20% cost savings on the components and parts that are resourced to our best-cost country suppliers around the world. Our projected cumulative savings for GPE and best-cost country sourcing programs is still approximately $240 million by 2015.

Our continuous improvement program, or what we call APS, AGCO Production System, is designed to help reduce delivery lead times and costs while improving quality. We have completed the rollout in our factories of our Six Sigma and Lean manufacturing programs, and continue to benefit from the sharing of best practices across sites and from employee involvement in the process. Slide 7 details the savings from our manufacturing optimization program. In 2013, APS is projected to generate $30 million in savings, and by 2015, we expect APS to drive over $50 million in annual savings. This program drives improved labor and machine productivity on an annual basis.

Slide 8 looks at another important area of focus: margin improvement from new product development. A prime example is our Centurion project that we discussed last year. It will consolidate 6 different platforms for mid-sized tractors and source major components from a new plant in China. The Centurion family will comprise a new range of modular engines, transmissions, rear axles and cabs. The modular design allows for a combination of these units that provide a full range of modern, cost-efficient tractors ranging from a simple 3-cylinder, 55-horsepower machine for an African market to a 4-cylinder, Tier 4 compliant, 130-horsepower cab tractor for the European or North American markets. This family also allows for brand differentiation and will replace the diverse range of products which are sold in large numbers in AGCO's world market. It will offer customers a modern, competitive, consistent range of products and allow for AGCO to build and assemble locally in important markets, while also leveraging critical component and manufacturing volumes globally in low-cost country environments. The Centurion program addresses approximately $1 billion of AGCO sales and is expected to result in significant sales and margin improvement. Start-up production of the Centurion tractors and drivelines will commence in 2014, with a progressive 3-year rollout of the full-range -- product range from the China facility, AGCO sites in South America and licensee facilities in India and in Turkey.

Slide 9 shows the factories that will be involved in the final assembly of the Centurion tractors. As a first base in our project, we are now assembling a localized Brazilian-designed tractor in an interim facility, leased in Changzhou, China, as a first product to sell in the local Chinese market. We have also started the assembly of newly designed, low-cost AGCO Power engines that will also be used in the Centurion platform.

In 2014, we plan to complete the final Chinese manufacturing site and progressively transition component production and final assembly to the facility throughout the year.

The Centurion program is targeted at the low end of the tractor range. We also have platform consolidation plans for our high-horsepower tractors, combines and other products. The new global platform and modular -- module strategy is intended to leverage common product architectures and integrated solutions across AGCO's different sites and brands. The key first step is to connect our global R&D centers through global modular responsibilities resulting in component standardization to lower cost and improve our products. We are targeting a reduced number of parts but with a high degree of differentiation through more consistent brand strategies and accelerated innovation. More plug-and-play type components will improve flexibility to enable fast product updates at low R&D cost and more effective R&D by doing things only once. We also expect to lower direct material cost because of bundled volumes and full transparency on global cost structures. The next few slides look at cost savings opportunities for the platform initiatives.

Slide 11 shows a sample of the level of complexity targeted in -- reduction targeted in our common platform development. As we work to simplify our designs and reduce the number of parts and suppliers, our goal will be to maintain a wide range of products with the appropriate amount of differentiation across our brands.

Slide 12 illustrates the commonality we have identified in the planning phase of our high-horsepower tractor platform initiative. The key components subject to differentiation are the cab, styling and operator interfaces. Everything that the user can touch, feel and see is differentiated and builds the brand identity. Functional components will be more common.

AGCO Finance is owned 51% De Lage Landen and 49% by AGCO. De Lage Landen is a fully owned subsidiary of Rabobank, one of the 30 largest banks in the world, commanding one of the highest credit ratings of any international bank. Rabobank specializes in banking in the food and agribusiness sector, so they understand the global agricultural market extremely well. AGCO Finance provides financing for about 50% of AGCO's retail sales in our major markets. Our joint venture is well capitalized with term match funding, liquidity guarantee to maturity and no term or interest rate risk. AGCO Finance does not rely on the commercial paper or securitization markets risk funding, and it stands ready to increase its participation in financing our retail sales as our business grows.

On Slide 14, you can see the growth trend of the portfolio as of December 31, 2013, the total portfolio is expected to be approximately $9.3 billion.

Slide 15 details the split of the portfolio between retail and wholesale and by region. Today, about 85% of the AGCO Finance portfolio consists of retail financing for AGCO's farming customers. The remainder is made up of wholesale floor-plan financing to AGCO dealers. AGCO Finance has consistently produced strong profits. AGCO now accounts for its 49% interest through the equity method, and AGCO Finance results are reflected in the equity and net earnings of affiliate line on our income statement. In 2012, AGCO share of joint venture earnings amounted to approximately $49 million. The quality of the portfolio is reflected by the low level of write-offs from the financing business. For the 5-year period of 2008 through 2012, write-offs have ranged from 31 basis points to 54 basis points as a percentage of the total portfolio.

Now moving on to capital allocation. From our discussion this morning, you can see we have a number of opportunities to invest internally. Based on these plans, we expect to have elevated capital expenditures through 2014. We also plan to continue to invest in product development to meet Tier 4 requirements and to provide new and innovative products to our customers. We will remain open to tactical acquisitions that can improve our product offering or extend our geographic reach. We also have the opportunity to return cash to shareholders in the form of share repurchases and/or dividends.

Slide 18 looks at our depreciation and capital expenditure trends. We increased the investment in some of our plant productivity products -- projects and new products over the last few years to support our growth and margin ambitions. Looking ahead to 2014, we expect to maintain our capital expenditures at an elevated level,, as we continue to work to meet the Tier 4 emissions requirements, refresh and expand our product line, upgrade our system capabilities, improve our factory productivity and establish assembly capabilities in China.

Slide 19 details a preliminary view of our multi-year capital expenditure plans. I want to highlight that as we get beyond the significant investments at our Chinese factory in 2013 and '14, we would expect the capital expenditures to step back down. Our Tier 4 capital spend will continue through 2015, and new products and new technology spend will continue to have priority throughout the planning period.

Slide 20 looks at the changes in our U.S. cash position that facilitated the $500 million share repurchase program that Martin announced before the break. Historically, AGCO's tax loss position in the U.S. has prevented the company from tax-efficiently repatriating foreign earnings to the U.S. parent. Due to the profitability of GSI and the improved results of AGCO's existing U.S. business, we expect to utilize all of our -- all of AGCO's U.S. tax losses by the end of 2013. This change in U.S. tax position, along with significant tax planning, has allowed AGCO to efficiently repatriate approximately $800 million. This repatriation is expected to result in no incremental federal U.S. taxes due to the utilization of foreign tax credits. A minor amount of additional state taxes will be required as we repatriate these funds.

The repatriation allows us to significantly expand our share repurchase program to $500 million to be completed within the next 18 months. We also look to responsibly grow our dividend in the coming years, and we are also committed to healthy returns for our shareholders as we expect to make cash returns an important component of our long-term capital allocation plan.

I'll finish my presentation with a review of our preliminary 2014 financial outlook. I think Greg is passing out these now. We'll go ahead and get started. Our preliminary outlook for 2014 for the 3 major regional markets is captured on Slide 23. This early view anticipates softer market conditions in all 3 regions. In North America, forecast for a lower farm income are expected to result in softer demand from the professional farming sector. Improved economics for dairy and livestock producers should partially offset a slowdown in low crop sales. Industry demand in Brazil is expected to remain healthy as favorable terms on government financing programs were renewed for 2014. However, constraints on funding levels of the financing programs and the impact of lower commodity prices are expected to result in weaker industry demand in 2014 compared to 2013. We are expecting a mixed demand pattern in Western Europe. Assuming more normal weather conditions, we are looking for some recovery in Northern Europe and in the U.K. After several years of heavy industry growth in Germany and France, we are expecting modest, softer demand in those markets in 2014 compared to 2013.

Slide 24 highlights the assumptions underlying our 2014 preliminary outlook. We are optimistic about the long-term growth and opportunities for our industry and our business, and our 2014 plans are aimed at helping AGCO grow profitably in this environment. Our 2014 forecast assumes price increases of approximately 2% on a consolidated basis. And at current exchange rates, we expect a currency translation to be relatively neutral.

In 2014, expenditures on new product development and Tier 4 emissions requirements are expected to cause an increase in engineering expense by approximately 3% or $10 million. We also look for new products in our productivity and purchasing initiatives that we outlined today to drive improved gross margins next year despite the flattish sales. For 2014, our SG&A expense will include expenses associated with site and manufacturing startup and market support costs amounting to about $10 million for our Chinese operations. We are also targeting an effective tax rate of approximately 34% to 35% for the 2014.

Slide 25 lists our preliminary view of our selected 2014 financial goals. We are projecting 2014 sales relatively flat compared to 2013 with softer marketing conditions reducing overall sales volumes. This impact is expected to be offset by pricing and modest market share gains. We expect to continue to improve gross margin growth and operating margin from 2013 levels as the benefit of our cost reduction projects are expected to be partially offset by the negative transactional impact of currency, a weaker product mix and higher engineering expense.

Based on these assumptions, we are targeting 2014 earnings per share of approximately $6 per share. For comparison, our current EPS target for 2013 communicated on our third quarter call is also for earnings per share to be approximately $6 per share. As we close out 2013, marketing conditions are starting to provide headwinds, which are causing our $6 target to be more challenging to achieve. We expect capital expenditures to be in the $400 million to $425 million range and free cash flow to exceed $250 million after funding the elevated level of capital expenditures.

That concludes my prepared remarks this morning. Before we take your questions, let me recap what you've heard this morning. First, AGCO is committing to improving shareholder returns. Second, we are well positioned for growth in attractive markets. And finally, we are executing a successful strategy to improve AGCO's returns.

And now with that, we appreciate your attention this morning, and we'll open it up for questions.

Question-and-Answer Session

Greg Peterson

Actually, please wait until the mic gets there before we -- and thanks.

Unknown Attendee

So just a couple of questions for you. Do you have a sense of the cadence of the buyback program? And how soon can you be in the market? Will we start to see the buyback play out in 4Q or is this a 2014 beginning?

Andrew H. Beck

We're still working at the details on timing. And obviously, there's a number of factors that have to be considered. But we'll -- we would like to get started early in the year. So we want to get started beginning of 2014.

Unknown Attendee

Okay, got it, Andy. And then just one more for me. Within the outlook for North America, can you just break it down between what you expect for GSI and what you expect for the rest of the North America business?

Andrew H. Beck

Yes. GSI, we have some sales growth forecasted in GSI in North America, probably a modest increase of around 3% or so. And then the rest of the business is obviously there. What we're seeing is -- expecting a lower industry for the high horsepower sector and then some offset in the lower horsepower sector. To offset that, obviously, the -- we talked a little bit about margins. And our margins will be affected in North America because the mix is different and our mix is higher for high horsepower tractors and combines and the professional producer sector and that's where the higher margin is on. So it's the negative mix that we're expecting next year in North America.

Unknown Attendee

Can you say more about the targets for share gains for next year, products or regions? And perhaps just give us an update on how the European combine development program is going and the sugarcane harvesting [ph] development program in Brazil and if you have market share targets there, that would be great?

Andrew H. Beck

We expect -- we do our targeted market share improvement in all our businesses. And specifics, as you talked about, we think we're gaining traction in harvesting in Europe with the new products that you saw where we're getting a recognition from the new products that we have from our -- from the awards we've gotten. So we've been gaining market share in combines in Europe, and we would expect to continue that. When you look at the sugarcane business, we're still working on the industrialization of that product -- on that product and making a lot of changes to the product, for instance, putting an AGCO Power engine in the product and making some other -- putting a new cab in there and things like that. So the product has been sold in somewhat limited basis to a few dealers this year. We will roll out the product to more dealers in 2014 and would expect some healthy growth as we get the product ready and expand the distribution in the market.

Martin H. Richenhagen

Good notes [ph] in Brazil in November. Our market share in tractors was back to the 50% numbers again and first time in history, so to say, but higher market share than Massey [ph].

Unknown Attendee

Two questions. One, Andy, I just want to make sure I understood your comments. Towards the end, I think you talked about more challenging conditions later this year relative to what you saw. Did I hear you correctly? And if so, can you talk about the impact potentially for your 2013 numbers? And then my second question, just in terms of your outlook for 2014, how much visibility do you have for this year relative to where we had last year? And are you assuming the first half to be stronger versus the second half or any difference in normal seasonality than what we would see?

Andrew H. Beck

Sure. As it relates to 2013, $6 is still our target. That's what we're going for, and our teams overall are aligned trying to achieve that. What we're trying to communicate today is that the markets are looking a little tougher, and that target is increasingly more challenging to achieve. So we're not changing our guidance. But we are wanting to make sure it's clear that, that target is becoming a tough one to get. So we're going to work hard for the rest of the year.

Martin H. Richenhagen

And the reasons behind in South America and Brazil, the FINAME program basically ended December 13. So after December 13, no new applications will be approved. So that is certainly a kind of change compared to previous years. And then we have markets -- some markets in Europe where we basically face a little bit more headwind. But as Andy said, we are still going for the $6.

Andrew H. Beck

And for 2014, I'll expect the first half of the year to be a little more challenging than the second half. I think that with the anticipation of some of the softer market conditions, our dealers are going to not want to build up their inventory levels as high as maybe, perhaps, they did this year. So I think a slower build of dealer inventory in the first part of the year, particularly the first quarter, will result in some softer sales in the first part of the year.

Martin H. Richenhagen

Our sales plan, basically, is generated by our salespeople talking to every individual dealer and getting their, basically, budget number. And then we mirror that with independent research we are doing together with our quality report. We ask the question do we intend to invest in 2014, what kind of equipment do we intend to buy and what is the brand you are looking for. And so this is how we get to our numbers. And the situation right now mainly in Europe is a little, I would say, uncertain because on one hand, you read a lot of very exciting reports. MTD just launched a major feature on the booming agricultural machinery business in Europe. But then you see certain markets with rather slow demand pattern. And that makes us being more on the conservative side. Well, conservative. We still think it will be a great year. So. . .

Unknown Attendee

[indiscernible] .

Andrew H. Beck

Our visibility is, I'd say, fairly consistent. We probably have 2 or 3 months visibility of firm orders. And then obviously, as Martin said, we work through that with our dealers and look at -- work on business plans with them.

Martin H. Richenhagen

Yes, and it depends a little bit on how far you are advanced in the built-to-order. So that means in some brands, we have higher visibility than others in those where we have huge dealers like Viber [ph], the Southern German coop. This year, Agritechnica sold -- on Agritechnica, we sold 3,001. So they only -- they sold already 3,000 Fendt tractors. So they, of course, have a much better visibility than a smaller dealer who maybe sold 50 or 20 a year.

Unknown Attendee

So just to finish that up, when you think about your backlog today relative to a year ago, how would you just talk about that?

Andrew H. Beck

It's smaller than last year by probably about 10% or so.

Martin H. Richenhagen

Yes. But in a 10- or 5-year average, it's pretty normal. So nothing...

Unknown Attendee

Great. And then I just have a couple of follow-ups for Andy. First of all, when you talk about margin expansion, a lot of that seems like it's under your control. So I'm wondering if you can just talk about if you're wrong about your market forecast and say things are down, I don't know, I'll make up a number, 10% for the company, can you still deliver that type of margin improvement or do you need the volume for that to happen?

Andrew H. Beck

Well, our business is heavily volume dependent. So the projects that we talked about in terms of purchasing savings and productivity in our plants, we feel very comfortable with -- that we'll achieve that. What offsets that, obviously, is absorption in the facilities. So the lower production, you don't get the leverage of your fixed costs, and then you're not getting leverage on your engineering spend and those kinds of things on your top line as well. So certainly, we need the volume that we have in this forecast in order to hit those margins.

Martin H. Richenhagen

Do you think that at 5 on [ph] 50 of earnings, we could still make the margin?

Andrew H. Beck

The margins would probably be flat or at that level.

Unknown Attendee

Okay, great. And just one other thing on ROIC. We focused a lot on the margin side of it. But when we look at the asset turns, it doesn't look like there isn't room for improvement. Sorry about all those negatives. I don't know if you would agree or disagree with that. Is there anything we can do on the asset side to sort of move that forward?

Andrew H. Beck

Yes. We certainly believe there's a lot of opportunity for asset improvement. And you can tie it back into some of those platform discussion we talked about in terms of the number of parts we're dealing with, the lead times that we're dealing with in terms of trying to reduce lead times with our supply base and working with a more professional supply base, working with fewer parts, bigger volumes within your supplier base should allow you to be much more efficient. So I think as we progress in this path to our common platform design, I think that will help us a lot on the inventory side as well.

Martin H. Richenhagen

The common platform project, I think, is the most important we have in the area of margin improvement globally. And that will, of course, take some time because we started pretty much from scratch. But I think this will show very nice returns.

Unknown Attendee

I think I'm next. Just following up on that, your low-cost country strategy, most large multi-national companies are moving away from that because they learned in the last down cycle that FX becomes a bigger risk, and also, it impacts your balance sheet in terms of working capital -- it increases working capital. Can you talk about why you're choosing to do low-cost country strategy now when everybody else is doing the opposite?

Martin H. Richenhagen

For one, it's not new. So we started this already several years ago. And second, because it shows pretty good improvement. So that means I wouldn't buy the idea that the big companies don't do that anymore. Maybe they don't do it as much anymore. And the driving factor is not -- in our case, it's not wages only. The driving factor is that they basically put 6, 7 different platforms into one, and that is where the payback comes from. The biggest market for this type of project is -- product is Asia, and this is why we needed a manufacturing site anyhow. And that is how the logic -- logics of our product work.

Unknown Attendee

Okay. And then my second question is just on the fundamentals. You talked about Africa increasing production, increasing productivity, et cetera. Martin, why wouldn't we believe that we are just in the beginning of a down cycle in terms of the fundamentals for at least U.S. farmers, perhaps Western Europe farmers on the wheat side and Brazilian and Argentinian farmers on the growth in production in those regions? I mean, this could be a multiyear cycle down?

Martin H. Richenhagen

Yes, I'm always less pessimistic than you have been in the past. I was proven to be on the right side all the time. So therefore, please be careful in what you predict. So my approach is pretty much that the fundamentals don't change. So the world population still growing, no change. Protein consumption is up in the emerging markets, no change how ever the economy in China or India is doing. Land availability is limited, and we have to double food production for 2015. That is a pretty big job. And so that basically supports my approach that we might be in a little slowdown. But I don't think that you saw the real bullish period of our business yet. So we saw certain signs. And I remember, when I came to Wall Street in 2004 and talked about that whole thing and growing and so on, everybody looked at me and said, "This stupid [indiscernible] environmentalist, what does he talk about?" And I think we are in that kind of boom phase for just a few years only. And I think it's a very, very fundamental paradigm shift people have to digest. And of course, during that time, we will see certain volatilities. You remember, 2008, everybody did get nervous. Nothing happened. And then 2000, we were up 26%. 2009, we were then down 20%. So even through the recession, our industry didn't suffer so much like many others.

Unknown Attendee

So I think we agree that the trend long term is positive but we could have some negative cyclicality for a few years?

Martin H. Richenhagen

Yes. What I think, I don't think so because I think Europe already don't do that well for quite some years. So England, Ireland, Portugal, Greece, some Scandinavian markets were suffering. Italy. And so I think sooner or later, we will see some change there. Some markets will come back. And then we also didn't see, let's say, a huge demand flow from Russia or from CIS, what we call CIS countries, yet. But I think we are very close to getting there. And therefore, I'm rather optimistic that it could already be that next year things turn out to be better than expected. But we are more, let's say, conservative. We don't want to tell you something and later on be disappointed.

Unknown Attendee

Martin, 2 questions for you. We saw you at Agritechnica. The show seems to be going well. Do you feel like Europe has gotten incrementally a little bit worse since then or is there a little bit of just caution on the guide?

Martin H. Richenhagen

Yes. I think it has nothing to do with our business or the fundamentals or the performance of the farmers. It's more like in 2009, that in many European countries, all news are only bad all the time. And so a lot of farmers, of course, also the professional guys are in a position to use their equipment year long or to postpone an investment. Just like wait and see, and this is the mood where a lot of customers are. France had a very good year this year, but we think that next year, this might slow down, not because of farmers doing not very well but because of the overall political situation in France, people being on slag and all the changes in tax with legislations and things like that. And those are the things that influence the buying decision much more than any fundamental change in the logics of the demand pattern in our industry.

Unknown Attendee

Great. And If I could ask a quick and unrelated follow-up. Do you have any update you're willing to give us on the likelihood and the timeline of local content certification in Russia? There's something you alluded to potentially having next year and the year after. I'm just curious if you could give us anything else.

Martin H. Richenhagen

On Russia?

Unknown Attendee

Yes.

Martin H. Richenhagen

Yes. But actually, we have the advantage -- we were thinking a lot about our approach. And so the first, we decided to go to Russia with a partner because I have done it -- greenfield in my previous slides, and that was not a big success because you don't find local support. It's difficult to find the supply base and so on. You end up basically with CKD solutions or something like that. And so we decided to carefully pick a local partner because our first partner went bankrupt. You'll remember that we had an engine joint venture with [indiscernible] and that didn't work that well. Now we found somebody who is much more viable. The company is managed Western-style. They have joint ventures with [indiscernible], Terex and so on. They use used to work with Western companies and already with a very light localization. Our product is qualified to be considered made in Russia and get the local retail finance support. We don't talk so much about it because competition could come and say, "Hey, can you please look a little bit more in detail here." But it's very important that you have a partner, and it's more important also to have the right partner. And when we did the -- when we signed the contract, they said, "Well, actually, Putin will come." And I said, "I don't believe that." And he was there. And I don't know whether you saw the pictures. So in his most casual sweater, and he was standing in a typical body language behind the guys signing the contract. So we do get a big support from Putin. I'm invited for private dinners. So I'm not sure whether I should go. Maybe I'll never come back. But the partner we identified is a great guy. He's one of those top oligarchs and his main business is aluminum. So he's one of, of course, very productive competitors.

Unknown Attendee

Martin or Andy, can you talk about South America? When you look at your forecast of down 5, I thought you might a little more conservative there given such a strong year in '13. Is it also Argentina is coming back and that's factored in at all? FINAME rates are okay. Are you happy with what they are? I mean, they're up decently but...

Martin H. Richenhagen

Yes, I would agree. But that could be -- let's say it's a blend. And so if you'll carefully listen to Ann [ph], maybe she thinks we are not conservative enough in Europe and so maybe we are too conservative in South America. I think overall, we try to give you a blended, realistic view of the business and what I would say is that this year 2014 is a little bit more difficult to read and to understand, including the question is it 1 year, is it 0.5 year, is it 2 years or things like that. And I think it takes some time to really find out what's going on.

Unknown Attendee

Okay. And then just one unrelated. Andy, steel costs, I'm sure, have been pretty good for you in 2013. What's your assumption for price versus cost in 2014 as you go...

Martin H. Richenhagen

Steel, we think -- I personally believe -- I worked in the steel industry for 10 years. I have still a very good context there and I think steel will be rather flat. So we see some growing demand in the U.S. from automotive there, the biggest consumer of steel product. And then you see, at the same time, a downturn in Europe. So therefore, I think it's -- pretty much globally, it's getting -- it's a wash. And they try -- of course, the steel industry, every quarter they try to talk prices up. And then so far, it didn't work. And also therefore, I'm very optimistic that it will be flattish, I would think.

Unknown Attendee

Martin or Andy, can you talk a little bit more about the dividend and how you're thinking about that? I mean, it's great to see the buyback, but you're paying out about 7% of your earnings right now. Why don't you just put it on the board for the first time this year. But still a pretty conservative payout ratio on a grand scheme of things. And you said you're going to raise it. But can you give us any sense as to what type of payout ratio you might be thinking about? Is the 20% payout ratio over 3 or 4 years an unrealistic rough objective to think about?

Andrew H. Beck

Well, when we try to size that dividend, we still need to make sure that we can fund that through our U.S. cash flows. And as you know, structurally, we're a little different and that only about 1/4 of our business is in the U.S. So our cash flows in the U.S. are smaller. Obviously, we have a lot of our corporate expenses in the U.S. and things like that. So when we look at our dividend, we don't want to be forced to -- into inefficient tax situation or anything like that. So we want to keep that -- we'll keep that, I think, building, but building slowly the dividend. So we don't have a payout ratio on our total income. We're focused on more sizing and according to how we're performing in the U.S. and that we want to make sure that we can continue to do that. The opportunity to -- on share repurchases was born out of this opportunity to do this repatriation, which was kind of a onetime ability to do that. And so that's why we focused on the share repurchases to return cash in that form. As we move forward, every year, we consider what our dividend should be, whether there is more opportunities in terms of repatriation in a very tax-efficient way. And that will drive our decision-making on what future share repurchases should be and what our dividend should be. But for the most part, we'd like to slowly increase that dividend.

Martin H. Richenhagen

One, I fully agree to what Andy said. I'm on one external board. The company is PPG. And they pay dividend for more than 100 years, and every year, they increase it. So this is a little bit my role model. Of course, the business performance has to justify this approach.

Unknown Attendee

okay. And then if I can just ask a follow-up on TAFE a bit. They're now, I think, your biggest shareholder or very close. I think they have 70% of the stock. In the past, you've kind of explained that as somewhat of a relationship-building gesture. Granted you guys have had a relationship for a long time, but if, can you talk a little bit more about that? Might they have grander ambitions? And how will they -- how will you think about your share buyback? Are you going to be competing with them [ph] and buy back your own stock in the open market?

Martin H. Richenhagen

Yes. What I can explain is a little bit the history of the relationship. TAFE became a Massey Ferguson licensee in 1960. And their core business at that time, they were the leading bookseller in India. And so they basically then started to manufacture Massey Ferguson tractors. We were and we became a 23.5% shareholder of TAFE. And basically, the stream of income for AGCO we generate for TAFE is, one, from the dividend; two, from basically distributing certain low-spec tractors made by TAFE in India and Turkey; and three, by using TAFE as one of our sources for those less cross-country source component. The relationship between AGCO and TAFE was almost completely broke. And we tried to basically revitalize it because we decided that we have plenty of opportunities and didn't want to go to India greenfield because this market environment is extremely complicated. And so we then started to cooperate more and better every year. The amount of bottom line contribution from TAFE 2013 were -- how much is it?

Andrew H. Beck

It's probably between $10 million to $15 million.

Martin H. Richenhagen

Yes. So it's not major, but it's growing. We think we have a potential of about $100 million. And a lot depends, of course, also on gaining market share in this low horse tractor segment we have. We are the exclusive distributor outside India. And so the next step then was that we decided to elect Mallika, the CEO and owner of TAFE, Chairman and CEO, to be -- and invited them to become a Director of AGCO. And in order to basically demonstrate her loyal support for AGCO, she asked us whether we would -- or she could be allowed to buy AGCO shares. And the approach is that she will stay at around this number. So she is not our biggest shareholder. Our biggest shareholder normally is Fidelity, I think, most of the time.

Andrew H. Beck

On and off.

Martin H. Richenhagen

Yes, on and off. She is the only strategic shareholder. And she is not in order to trade or to be in and out. So that's a long-term commitment and she will be

[Audio Gap]

communicate well with the different partners out there in terms of feed providers, agronomists. those types of things so that we have the ability to work with a number of partners and work with -- a wide range of customers will be available to us.

Martin H. Richenhagen

Yes. What we call is super system and what actually is the danger is if you put everything in one basket in this area. That can be risky because a sudden change in a satellite or a satellite technology can basically make your whole investment void. So that is why in-house solutions which is based on one solution or one system can be dangerous, as well as single sourcing. So this is an area where we decided to have several solutions, which we can use if needed.

Unknown Attendee

If you look at your 3 big platforms being developed, you have Timble's [ph] approach and your nonspecific partnership with CNH Global. You have Monsanto and now you have -- you're partnered with DuPont. So do you still need to tie up with one of those groups or do you think you can maintain this individual subgroup and...

Martin H. Richenhagen

No, I think Monsanto and DuPont, they are also in -- they are only in certain niches so far. That might change over time, but they are not really people which can help us or which can help our customers for what they need in the future. So when we talk to our customers and to customers from competitors, we figured out that they, like our [indiscernible] with open architecture and the idea that basically, our products communicate with everybody and our systems will communicate as well with John Deere or Monsanto or DuPont or whoever comes into the market. So that's the idea behind it.

Unknown Attendee

It sounds like you expect the second half to be better than the first half. So I guess I'm wondering, to what extent is that dependent upon in expectations that commodity prices improve post-planting? We've heard from some dealers that things are sort of coasting until June. And if it's not based on improved commodity prices, what are you anticipating as being the bigger driver in the second half?

Martin H. Richenhagen

Yes, we don't -- in our plan, we don't assume major commodity price increases. We have pretty good information about those because our main partner here in research is Rabobank and we have a pretty good global research. You get it also from other sources. So therefore, we think that there's a certain potential that prices will go up. But we didn't put that into our assumption.

Andrew H. Beck

I think what we're expecting is that there's a lot -- can be a lot of -- fair amount of year-end buying with [indiscernible] and things like that in place. Farmers are going to make a lot of money this year. And so I think they'll take a cautious first half of the year. We'll look and see how commodity prices develop, how their crops will be developing in the field. And so that's another reason why I think there will be more cautious approach to buying in the first part of the year. And then once they have more visibility and confidence, that could change.

Unknown Attendee

Okay. And then as a follow-up, what kind of feedback have you gotten from dealers regarding sort of end users' willingness to accept the price increases that you're putting into the marketplace this year?

Martin H. Richenhagen

Yes, so far we have our price increases more or less implemented as scheduled, and I don't see a reason why that shouldn't happen in 2014.

Andrew H. Beck

As follow-up to that question, can you talk about how we should think about pricing across the regions? And then my original question was, do you have an outlook and estimate for production units at the Fendt factory relative to the 18,000 that we should see this year or so, production next year at the Fendt factory?

Martin H. Richenhagen

Yes. This year, we are, in units, close to 18,000 is scheduled, which has a certain overlap between 2012 and 2013 because in 2013, we were -- in 2012, we were short by about 1,000 units. Our assumption for 2014 is 17,000 units.

Unknown Attendee

And the pricing question, should we. . .

Andrew H. Beck

I think we're saying 2%. It should be pretty consistent around the world.

Unknown Attendee

And just going back to the Fendt question. Should we expect margin improvement in Europe with lower volumes at Fendt?

Andrew H. Beck

We're still anticipating margin improvement in Europe as we continue to be more productive within the Fendt facility and some of the other margin improvement initiatives that we have in place.

Greg Peterson

We had some headwinds in the first half of the year in Fendt because of the production environment, and we ramped that up through the year. So that probably offsets some of the volume.

Unknown Attendee

I just wanted to clarify the Centurion product line. Is that $1 billion in revenues now? Or is that the forecast for the future? And then the operating profit level there?

Andrew H. Beck

That's the current sales level of that range of products today. So the improvements that we've put in there is a combination of the margin improvement on the new platforms plus an expected level of sales growth because of the new features and ability to sell that.

Martin H. Richenhagen

And with regard to our brand differentiation, this product will be only available for Massey Ferguson and Valtra.

Unknown Attendee

Okay. And the margins on that business are in line with the rest of the company?

Andrew H. Beck

They're lower. But they're -- this makes them less low than before.

Unknown Attendee

And then my real question is can you go through the different regions or the different businesses and give us some idea of the size of the parts business just so we can figure out the stability if the OEM business moves up and down, the stabilizing factor in the parts side of the business?

Andrew H. Beck

Overall, parts is about 15%, 15%, maybe a little under that. They'll have in all those -- in South America, it's lower percentage.

Greg Peterson

Yes. In South America, its about 7% or 8%. And then if you look in Western Europe and the U.S., it's high teens. And that typically is because as the market moves up in the technology family, more of the service has to be done by the dealers. So we capture a much higher percentage of the parts business. And so that has obviously happened in the U.S. and in Western Europe and is happening now in Brazil. So over time, we would expect to see parts sales increase in Brazil as the sophistication level of the equipment improves. So we're as still, as I said, around 8% in Brazil.

Martin H. Richenhagen

Also, mix is important. So in harvesting, you typically have a higher amount of parts than in tractors. And in tractors, the lower the technology is, as Greg said, and the older the design, the less parts you sell -- original parts you sell. So that is why, we invested in that private parts business for the products.

Unknown Attendee

Given the supplier response in Brazil, higher rates and now leaner margins performance going forward, do you think that we need land expansion and lower rates beyond, say, '14 to grow in that market? Or there are other opportunities for increased mechanization, maybe, to grow? It seems like it might be at a peak given where...

Martin H. Richenhagen

The level of mechanization in Brazil is still below North America. Plus the technology they are using is maybe some generations behind America. So they have a lack of tractors with no caps. They have -- most of the tractors don't have air condition. Horsepower are lower. They don't have -- we just launched this year the CVT tractor. So that means there will be a move towards more Western-style product. And that does get quite some traction. So we think -- we are working on a project where we localize the same CVT tractor we are selling in the U.S. for the Challenger brand, also in South America. And we'll start very soon -- we already started to sell imported tractors. And as a next step, we will do CKD and then we go into SKD and then complete localization.

Unknown Attendee

Okay. And then secondly, just to clarify on the Fuse Technology, is it designed to generate subscription sales for AGCO and its dealers or incrementally sell more hardware? And if so, maybe what would those subscription sales look like in 3 to 5 years?

Andrew H. Beck

I think most of it is going to be to sell more equipment and be competitive in the marketplace. We are starting some -- piloting some service basis-type business that will provide to a customer the ability to monitor its fleet and to see predictive information about the fleet, be able to track where it is and manage it better. I mean, we can provide services in that form. There is a dealer that is just really in its infancy right now. I wouldn't be able to tell you what amount of income that would be. But we think that will -- there will be more and more opportunity for us in the future. But I think most of this is going to be around selling equipment.

Martin H. Richenhagen

I think if somebody came and would tell you that the future of this business is moving from hardware into software, you have to be very careful because. So far in our industry, there are only very, very few applications which are sold. Most of the applications are sales incentives or are given away. We are breakeven in that area. Most of our competitors invest a lot of money and their precision farming division is making losses over more than 20 years now. So therefore, the idea that in the future, you'll make money with precision farming and give the tractor away, I think it's the opposite from what I believe.

Greg Peterson

We probably have time for just one more question. And so right over here, yes.

Unknown Attendee

Andy, this one is for you. Can you talk about your confidence to recover [indiscernible] related costs? And can you remind us if that is included in the 2% pricing that you're guiding for this year?

Andrew H. Beck

Yes, it is included in our pricing estimates. The -- based on history, we are confident, we'll recover it, I think it's well understood there's a cost increase associated with Tier 4 products. And as we moved up from Tier 2 to 3, Tier 4 all the way, we have not seen any issues with recovering that. Farm incomes, although predicted to be down, will still be good. And so I don't see any issue in the marketplace to recover those costs.

Greg Peterson

That actually is all the time we have this morning. We'd like to thank all of you for your interest in AGCO and your participation this morning. And I encourage you to follow up with me later today or tomorrow with additional questions. Thanks, and happy holidays, everybody.

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